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So this is about either Lily, it is buying another company called hang On, let me get my notes.
Thank you.
This is why I love Paul Morphic parent. It's going to help your gi track, which everybody really needs. Let's be honest. Sam Zelli, Bloomberg Intelligence, Director of Research for Global Industries and Senior Pharmaceuticals, joins us from London.
Hey Sam, what is Morphic? Do we like this deal?
What are your thoughts?
Yeah, so, Alex, thanks for having me back on it's been a little while. So this deal is about adding to their immunology franchise. Of course, everybody knows Lily for the endless thing headlines that are related to GLP ones and obesity and cancer. Today we have apparently ten cancers that are not cured, but risk is reduced with those
types of drugs. But the reality is there's a lot more to this company before the GLP one business ballooned with regards to obesity, and one of the areas there in is immunology or otherwise known as immunology and inflammation or inflammation and immunology I and I and I and I is also a very attractive area because these are areas where we all have issues with arthritissoriasis, Crow's disease, if elamentary bowel disease.
All these things are stuff that we have been suffering from for years.
Obesity probably increases their risk too, so and there've been a very active company in that space with three drugs four drugs on the market already and they've been doing deals adding to it.
SAM three point two billion dollars is not a big big deal for Lily, But is this typical of what we see at a big pharma companies in terms of if they see a therapeutic or just a piece of science as interesting to them, it's better to buy than develop internally.
Yeah, So I would say they're around thirty to forty percent of pharmaceutical companies. Pipelines comes from this type of interaction, either at.
An M and a deal I e.
Bought the whole thing lock Stock and Barrel, or I license a specific product in this case.
So I'm looking at Lily. We have a database.
Of course, we have the MAA function in the Bloomberg terminal, but we've taken that and dissected a little bit more and added on the bi dashboard and detail about the types of drugs that are in.
Those deals, and MNA is one of that.
So I'm looking at twelve deals that Lily has done in the past five years, and I'd say that only like three or three of them are in the cardiovascular metabolic space. I either diabetes OBS, the rest are oncology CNS, and of course two are inflammation and immunology, and this is one of them. So now it becomes three, right, because that's not quite updated yet. And they're all in the sort of range eight billion for locksow one point one eight hundred and eighty million, two point four billion.
So we've got a good bunch of deals, and they're all in that level which the Farmer company is called Bolton Acquisitions, and that's their sweet spot of M and A.
See Alex.
Everybody thinks that the smart people in bi pharma healthcare researcher guys people like Sam Fazelliot.
That's not really the case. It's this young lady named.
Grace and she's in Princeton and she maintains a world class model that tracks the millions of drugs that are in various stages of you know, reviews around the world, and clients put huge value on that work that she does, and that allows Sam and some of the other anamals to go out there and talk about these drugs.
So Grace a great job.
As always love Paul shout out that was awesome, so true.
And he needs to This particular shout out goes to another great lady who's called Mila, Mila Bankoskaya, who's also part of our team.
But nobody matches up to Grace.
Of course, Grace has been in the Catalyst calendar that year and I don't match up to her.
Nobody matches up to her.
Okay, So based on that, what are some of the cool things that are out there, like cool drugs that we should be talking about. We never get to talk to you when there's no crisis, really, so what are some cool things out there?
Yeah?
So obviously the OBC space, there's there's breakneck evolution of different modalities being combined trying to make it much more focused on fat, preserving some muscle, making it work better for the liver part.
Of the disease.
And that's all going to come to fruition over the next two or three years. On colog years, I've been saying all along is seeing amazing developments.
You know, we're developing.
These disease hubs, as you might know, and just for lung cancer, we're developing almost thirteen different subgroupings of lung cancer. And it just shows you where treatment of these diseases have got to. And the same applies in inflammation and imminology, and in that space we're dealing with technology that is
really cool. This particular acquisition and the one that they recently did its almost exactly a year ago, called dice therapeutics, are all about dealing with proteins that are very intractable to inhibition and normal drug discovery, and these two companies have developed oral drugs small molecules that interact with these targets.
And the beauty of this, of course is do you remember all that worry.
That when people were having about what happens with the IRA inflation reduction acts and its impact on small molecule development, because it specifically puts them out, saying, after nine years, irrespective of your patterns, we're.
Going to come back in and negotiate prices.
Well, here's Lily who's done two deals that are specifically small molecule deals. When the biology is interesting, when the drugs are interesting, I think the deals happen. Now, whether these will get to market or not, who knows. I mean, farmer isn't infallible when it comes to these deals. But this shows that when they have they see something interesting, they go for it, irrespective of small or big.
Molecule sam People for better or worse, are living longer and longer lives, which makes every family it seems like it's dealing with some type of dementia, Alzheimer's and things like that. How does the farmer, the farmer industry, healthcare adustry, how do they think about that? How are they kind of getting ready for that?
Yeah, so you know the beginnings. Can I just give you an example.
An analogue for Alzheimer's disease is obesity. We've been at this obesity game for a year, ten years, fifteen years, twenty years. I remember one of the old drugs from Rush Pharmaceuticals that are that's still around called ally that reduced the amount of fat.
You absorb as you eat.
Of course, what does that create fat left in your stomach lubrication. I'm going to leave the rest of it your imagination, right, So, that was the idea that was going to be helping you lose weight, maybe three percent, four percent, five percent. And then it took a lot of time before somebody started discovering these things saying, oh gosh, we can get to fifteen twenty percent. If you're a two hundred and fifty pounds person, we can help you
drop seventy pounds. That happened in obesity, I'm hopeful that the same happens in dementia and neurodegeneratic diseases.
It's very much tougher.
I mean, all biology is tough, but CNS is tougher because it's a black box. It's a disease that evolves over twenty years, thirty years, and by the time you your disease manifests, you've already had a lot of organic change to your brain. But there is the first products that are approved. With the first products approved, you do get a bit more incentive to develop the next one.
Go better, Go another mile further, and that's where I'm hoping at the very least in Alzheimer's disease and Parkinson's we're going to be going there.
Other diseases are a bit tougher. Still, do you.
Think that we'll ever have a preventative drug for Alzheimer's or just a treatment.
To delay well, the I think it's very tough to prevent because how do you know who's going to get it? That means you and I especially I, because you guys are much longer than me, younger than me. Paul is he's just coming out of school, right, So my thing is that at what point do you start taking these drugs?
Right?
How do I do that? So that becomes difficult? Who pays for it?
And if they're preventative, how long do I have to take them before I know? I mean, how do you even do a trial there? So don't forget though, Now that's disease. You can go into the early mild dementia and try and slow down the disease, but step at the time, at a step at the time, and nothink will we'll have something, might take a decade or two, but hopefully will have them.
And Sam again, are these is this something if we see announcements on this front will likely be, you know, the big form of companies that you cover making and acquisitions of some of these smaller companies that are just focused on this one particular thing.
Probably, and don't forget that also the large farmer companies. I mean then the two drugs that we have on the market today that can be and I forget what Dunana maps caol has just been approved, so I can't remember it a branded name.
I'm sorry, Iliy.
They both came from within either the farmer company or the a Japanese partner. However, in the case of the can be that came from a Scandinavian biotech, So both of these are true.
The question is who's got the firepower.
The money to spend the billions required to develop these and that's often ends up being the farmer companies.
It's the large farmer companies.
Do you feel like, no matter who gets to be president in here in November, here in the US, are we going to see massive drug pushback? Like I realized, it's probably a campaign tactic. But President Biden coming out last week and talking about how all the things were so expensive and really blaming like Novo Nordos. He wrote an app that with Bernie Sanders in USA today, what do you.
Think I think this is a hot potato, which hand them are going to? I think it is a I don't think they are aiming their guns at the right group of companies. I think you could always argue that drug pricing because it's the easiest thing. It's a drug that people have to buy, and it says Lily on it right, is difficult for some people.
A lot of people can't afford them.
But there's a lot of middlemen that need to be looked at to where the where the increasing cost comes from. And you know what, the best way to entice people to develop obcity drugs, to bring down the price, to bring up competition is to allow the market to do his job. The market will do it already. These things are not costing ten one thousand dollars a month. We're more closer to five hundred net. Let the market to the job, bring more drugs. On the volume goes up, you can drop the price.
Hey, Sam, thanks so much for joining us.
As always expansive discussion, like we like to have a san Fazelo in all things. A big farmer in biotech Sanfazeli. He's he runs up Bloomberg Intelligencing over there in your force, and his day job is being one of the top healthcare parmer analysts in the city of London. Eli Lilly back at a bus. I've said it before, I'll say
it again in my next life. I'm coming back. I think as a healthcare m and a banker, because everywhere every Monday, it seems thinking to wake up and boom, there you go, Illely buying us biotech Morphic three point two billion dollars.
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A lot of folks are getting concerned about this marketplace. Is equity market's been higher, there's evaluation concerns. There's headwinds about when or if this FED is going to cut rates. There's concentration risk is probably ranks pretty highly with me. Let's check in with a professional and see how they're thinking about it. Shelby McFadden Investment analyst, Motley Full Asset Management joining us from Zoom via Zoom from Alexandria, Virginia. Shelby,
how concerned are you about this marketplace? How do you feel about this market? Are you confident that this equity market can continue to move higher?
Where are you these days?
You know?
I would say this sort of confidence and concern is sort of a two pronged issue, right. So the confidence, who can say, right, we all kind of wish we had a crystal ball, especially as active managers. But the sort of confidence, I would say, is rooted in the fact that this is the precise sort of market where
you can sort of find those opportunities. They may not necessarily pay the dividend right away, and that sort of goes to the issue of concentration that you had mentioned in the introduction, where you know, to look for those winners, those diamonds in the rough that may not be sort of paying off right now, But when that return of breath comes back, that's when we sort of get to see the fruits of our labor. And that is right there the crux of active management so valuations they're rich.
That can be concerning. It's never exciting to have to sit and wait for that golden opportunity that we've been watching out for, but it absolutely pays off from the end, and that's why we stick to that high quality strategy.
Do you care about breath? Do you care about the seventeen hundred stats that I read today about how you know the top seven stocks reported x amount of the gain in the S and P so far this year? I say it glibly because I feel like we've been talking about this for like nine months, So how much do you care about that now?
I would say that breath does still matter to us, and I even say that given the fact that we have what are considered more concentrated portfolio. So you may be thinking, how does that even make sense? It makes sense in the concept rather in the realm that compared to the SM compared to what we consider the broad market, we are more concerned with finding opportunities that are not
necessarily just all concentrated in one space. So when we do look at our active ETFs, they're not always going to reflect the main stocks that are moving the market. There are going to be some more sort of niche concepts in there that underlie some of the main processes that keep our economy going. So when we look from a portfolio management perspective, breath is increasingly important to us.
Shelby, how do you think about earning season. We're going to kick it off Thursday with some of the airlines and then of course the big banks kicking off on Friday.
What are you looking for this quarter?
I would say, going into early earning season, you know, we're not expecting anything to earth shaking from the big banks for the most part, they've already gotten all of their shakeouts going. We might hear about a little bit of M and A activity, and you know, mainly following
the regionals after the big banks. As we go further into earning season, I think one of the key things that we're looking out for is going to be back office spend, those sorts of budgets on any sort of CRM technology advertising, all of those sorts of software platforms that made a lot of revenue in the past couple of years. So we're looking to see where corporate budgets are going, but also in the retail space, how is the consumer holding up? The summer is a little bit
more dry in terms of promotional activity around holidays. You've got Memorial Day for Labor Day, so there's a lot of those really big chunks of weeks where there's not as much promotional activity, and that's where we're going to get a truer sense of how the consumer is doing. So we'll be having a good lookout for that sort of easter to end of Q two.
Chunk for the back of the office spend are you watching specifically, like if that budget grows or just that budget stays versus shrinks, or like where it's going to actually be going and how the money is diverted.
It's a sort of all of the above, right, because that's all going to tell us a different story. So if it is shrinking, that starts to tell us that potentially companies are in a spot where they're so concerned about their coffers that they are now less concerned about efficiency. We think that's a little bit less likely because when you've got shareholders, you tend to need to focus on efficiency.
So we're sort of looking for that stable to growing for a number of companies there, their own sort of projections are depending on a return to growth. So a return of company's desires to have more efficiency. So I would if I had to put money on it, I would probably say, we're expecting to see on the whole plot to growth in that area.
Shelby.
Earlier today, we were speaking with the head economists at MasterCard to get a sense of kind of how the consumer.
Is behave shell Meyer.
Yes, love her, excellent, excellent, We love you too, and she she's saying, just the data that they see, the consumer is still spending and the consumer looks pretty healthy.
How do you think about it?
You know, it's interesting because some of the recent pieces that I've read have pointed to the fact that there's a big cohort of millennials and young or older rather gen z that are coming into the stage of their lives where they have to purchase certain necessities. The amount of money in life that they spend is just growing because it has to. And then when you put on top of that the sort of economy that we're in where things are more inflationary. We know that we're fighting that.
Right now, you switsh those two things together and we get a picture that looks like a very healthy consumer
on the top. You know, the superficial most level, and as we sort of drill down, we see a sort of obligation to spend when we look at the fact that retailers of things like shoes, shoes are broadly pretty weak right now, and so we think about the fact that people are not wanting to pick up those little things in the store, those little articles of clothing, you know, extra pairs of socks, things like that that you used
to kind of use to comfort yourself. You drill down to that you realize a lot of the spending is not so discretionary and healthy in the sense that money is being spent, but the discretionary spend not as much. So I think we have to really drill down to see what the consumer is feeling. How do you play it? I think the way to play it is one as you meant, there's a way to play it with MasterCard, which is they're a toll taker, so you go ahead and just frankly take advantage of the fact that cars
are going to be swite. Another way to play it is taking the premium end of the consumer. So when we think about companies like Costco, they're offering value, but they're offering really sticky value in the way that they're a little bit higher on the income schedule. Another way
to play it is Amazon. You look at the fact that they are retail, They've got a strong retail base, and then they've also got their aws space, so they really rooted themselves pretty deeply inconvenience for both corporate and consumer. So I think it really comes down to one companies that have deeply rooted themselves across the cycle, and two premiumization and three toll takers.
So I see you you've got cost go there.
So that kind of to me says you have, you know, kind of a fairly constructive call on the consumer. What's the feeling behind your costco name?
Well, one of the things we love about the costco business and why it's in TFC and a number of our portfolios, is that they really generate a sort of annuity type structure. Their primary earnings are really or their most stable earnings I should say, are coming from those memberships, and they've really figured out a perfect timing on those membership increases in such a way that it's almost gentle
to the customer. They've established a relationship and so when it comes people aren't really you know, running for the fences, and then on top of that, they've got the best cost position in the industry. So we have actually seen over the past eighteen months or so when we listen in for the calls, they lower prices when they can. And I'll even say anecdotally, when I go to Costco, I have pointed out to my husband had said, that's lower than it was.
A quarter ago.
So they are holding up on those promises and being able to do that is really really important, and being able to sure the consumer who can afford that executive membership further solidifies their place in their peer market.
You also like Amazon, but that's less of a retail play, right, that's more of a cloud play.
A bit, yes, so we do know that they've sort of solidified that position in retail, but the cloud play is right now in terms of valuation, of course, what's really most sensitive for them. And that's also where at this point our thesis is sort of tipping towards. So the additional growth that we are hinging any sort of investment on for Amazon comes from the cloud space rather than retail, and so that's what we're predominantly looking out for.
We're looking for operational leverage there as well as continuing to solidify their reputation and continue with innovation. So, you know, retail is always going to be a little bit wobbly in terms of, you know, any sort of regulations that are coming things like that, But on the whole, it does seem like the balance between what they do for the consumer and their competitive position seems to be sort of leveling out. So really the thesis hinges on aws.
Hey Shelby, who is a typical investor or customer of Motley Full Asset Management.
Yeah, I would say a typical investor would be someone that is looking to access high growth names in of course you know, global but primarily US markets, but looking to do so by stepping outside of the concentration of the US market. So even though the portfolio itself and an average portfolio for US is going to be fifteen to thirty stocks, it's someone who's looking to beat the market over the long term, over ten to fifteen years, go ahead and build that wealth by making choices outside
of the sort of status quo. And that doesn't necessarily mean that we're just choosing really really niche sectors that no one's heard of, but we are looking for those high quality companies that are going to focus on cash flow and be a bit more resilient to the cycle and therefore deliver focusing really on upside capture especially.
So then to that point, do you not care who wins the White House in November? That could definitely influence policy, particularly when it comes to climate and environmental laws. But in general, are you able to look through that or how do you manage it?
I would say in the short term, it's not something that we're integrating into our strategy because it's not something that we have control over. In the long term view, we understand that there could be some sweeping changes, but we do also know that that legislature will take some time. So we keep our monitors out. We have our various lists and various contacts that we are in touch with, calls that we will tune into so that we can be on top of things to adjust our models appropriately.
So I would say that in terms of our strategy, we have to sort of be a bit agnostic.
I can't.
I don't know that I would say we can care because that may do a disservice to our investors to say it has to be this for us to succeed. We are determined to make sure that we adjust accordingly with any regulations or policies that change to make sure that we can serve the active investor as best we can.
All Right, Shelby, thank you so much for joining us. Shelby McFadden.
She's an investment analyst at Motley fool Asset Management. Joining us from Alexandria, Virginia.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Card, play in Android auto with the Bloomberg Business app, Listen on demand wherever you get your podcasts, or watch us live on YouTube.
This Monday, though, we're going to go outside the Bloomberg Intelligence world and take a look at what's going on with ETFs. Joining us now is Sean O'Hara, president of Pacer. ETFs has forty five billion dollars assets under management. He joins us from Pennsylvania. So Sean, we love this topic, like who's buying, what, where are the flows? Where are they coming out of We just ended the second quarter, we're kind of kicking off the back half of the year. What's the setup.
Well, it's the same setup as it's been for the last six months to eighteen months, and that is that you know, essentially five to seven stocks are really responsible for all of the performance. So I just read an article this morning that said I Shares had one of its biggest NetFlow periods over six months, and I think that's mostly driven by people buying the outright the S and P five hundred. Obviously, the cues continue to take
in a lot of money. The one word of caution I would say though, is that you know, mostly those ETFs to track those broad indexes are meant to be diversified portfolios, and what's going on today is the opposite of diversification. So although the ETF industry continues to take in almost record flows across the board, in these big broad market market cap weighted ETFs, I think investors need
to be a little bit wary of the exposures. You have, forty something percent of the cues is like seven names, and so as it goes up, we could just as easily see things come down as people start to view some of these big tech names and these big AI players as more closely or more close to fairly valued.
So how concerned are you about this market and the concentration in this market.
Well, you know, I'm a believer in AI. I think you don't have to be all in one way or the other. I think, you know, perhaps from my perspective, I'd rather be a little more balanced. I have exposure to the AI trade in various different forms, but I also have some lower PE, high higher quality stuff that you know is kicking off nice dividends, and so you can sort of wait and see what happens, and you're
less susceptible to a big drawdown. If let's say the FED decides not to cut, or we get to the third quarter earnings reports and those numbers have now been adjusted high and higher, and somebody stubs their toe. You could see a big reaction to that. So one of the things that I think makes sense for people for part of their portfolio is to lower the overall portfolios PE before the market ultimately does it to them, which
it will at some point. You know, the SMP is still trading at twenty two to twenty four times earnings, in the nasty is over thirty five times earnings, and those numbers, although they make us all feel happy as we're riding them up, eventually the market is sort of going to revert back to that mean, And those numbers are somewhere between twenty and thirty percent above the historical
long term averages. So I think it just makes sense maybe to be a little bit more barbelled as opposed to all in on one trade.
So does that imply then that if you're going to barbel at two, do you need to barbel it across as a class? As we've seen a lot of money contine to flow into bond ETFs, what are you noticing there?
Well, barbelling, for example, you could just as easily buy the equal weighted version of the S and P five hundred next to the cap weighted and that sort of would give you that barbelle right, You'd have more exposure to the bottom half of the S and P five hundred and less exposure to the top half. And there's an equal weighted version of the queues as well. In fixed income land, I think people are mostly pretty satisfied just sort of sitting in short term treasuries at five percent.
There's been a lot of money going into those types of vehicles. I don't think on the fixed income side that we're doing sort of what we've been doing on
the equity side, and that is we're underpricing risk. I mean, spreads are fairly narrow on a historic basis, and so you're not getting paid what you might normally get paid to go out the credit scale, maybe to you know, high grade corporates or to high yield and so I think if you can just collect five percent in the short run for that money that you maybe ultimately will deploy, makes a little bit of sense. We're seeing some flows into international and global. I think that's really just a
rebalancing trade. The last five years have been dominated so much by large cap us that I think investors' portfolios have gotten out of balance a little bit. And so I think people are starting to push more money into
global and international. And then we've seen quite a bit of money go into small cap for the same reason that and that is that you know, if because of this massive performance advantage of large cap us versus everything else, portfolios have gotten out of whack, and I think people are wise to sort of rebalance their portfolios that are more in line with what a longer term objective might dictate.
Twenty twenty four is an election year. How concerned. Are you about that?
From a I guess a stability or volatility perspective for markets and maybe how to position yourself.
Well, you have two different agendas, right You have one agenda that you know is going to be more government and higher taxes theoretically, and you have another agenda that's sort of less regulatory oversight and lower taxes. And I think the market will be volatile between now an election day, as you know, these candidate surge and fall in the polling,
and so it'll be interesting to see. I don't think that now is the time to start really putting on those election type vets into a portfolio, because there's so much time between now and November. But I think as we get closer to November and people start to really develop a clear view of who they believe will ultimately win the election, I think investors will start to position portfolios accordingly.
What's the one where we let you go, what's like a risk that no one's talking about or not a lot of people are talking about that you see in the market right now?
Well, I said what I think is the biggest risk in the market, and that is that we're highly, highly concentrated and this happens from time to time. It just never lasts. We don't know how long this will last, but it's not going to last for five years. It's been almost two years worth of this massive imbalance in terms of the weight in portfolios across the broad market indexes.
And I think that's one risk that Look, we're human beings, right, and so we get ephic, and when things are going well and we're making money on investments, we sort of ignore some of the potential pitfalls. And so I think the big risk is that we don't get as an aggressive fed approach, and that we get into the third quarter in the fourth quarter as those tech names are
sort of running uphill right. Their earnings have been growing, but their forecasted earnings are supposed to be higher, and if somewhere along the way and by the way, it's much more difficult for them to make those increase earnings numbers because of the massive size of these companies. That could potentially be a risk that people are ignoring right now.
All right, Sean, thank you so much for joining us. Really appreciated. Sean O'Hara, president of pacer ETFs. They're out there on the main line of Philadelphia, Malvern. Beautiful part of the world out there, right across the road from the Home Vanguard Complex. All that kind of index money is all out. There's smart folks down there in great Affhilly area.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty Alex.
You know me, There's very few places in the world that would get me away from my beloved Jersey Shore. True, but the low country of South Carolina is definitely in the running. It is beautiful down there, nice people, beautiful part of the world. And that's our next guest is Jared Dillion. He's the founder of The Daily Dirt NP. Jared main ways to go on this thing. I think for a lot of investors as they look at these stock markets, they look at their four to one k
they're doing pretty well. But boy, there's a lot of headwines out there, and for me, maybe the biggest one is the concentration risk in this market. It gets me nervous when I pull out those Magnificent seven that my market's not doing a whole lot.
How do you think about that?
Yeah, I think about it the same way as you do if you look at Actually, you know, funny you mentioned. I was on Twitter a couple of weeks ago and somebody had posted a paragraph from an interview with Stan Druckenmiller, and this was about the crash of nineteen eighty seven, and Stan Druckenmiller had cited a couple of reasons why he got bearish before the crash of nineteen eighty seven, and one of them was the constant creation at the time was the fact that the market was being led
by just a handful of names. And if you go back in history at all these major tops, that usually co occurs with the top is that you do have extreme concentration, and we're certainly having that today.
So what does that then mean? I mean, just because history doesn't always repeat at rhymes that whole thing, which like I also roll my eyes at that too, And what that looks like. No one's going to doubt that we're in some kind of bubble, but no one knows what the bubble winds up looking like and how it bursts, and that puts people in a really big buying if they're trying to make money.
Well, the way I look at this is that the cost to protect a portfolio that looks like the S and P five hundred is the lowest that it has been since twenty nineteen. If you go back towards the end of twenty nineteen, options became very cheap, and then you had the pandemic in twenty twenty and they exploded in value. You this is the cheapest that protection has been in the last five years. So you know, a day that I think about in particular is February twenty seventh,
two thousand and seven. That was the day that China raised reserve requirements and the ABX dropped by ten points and the VICS exploded from ten to twenty in a day. Usually when you transition out of low ball regimes into a high ball regimes, it is a very violent move.
So, Jared, we're going to be starting earnings at the end of this week. We have the some of the airlines and then the big banks on Friday. Is this earning season a catalyst or a potential risk for this market?
Do you think.
I don't think it's much of a risk. You know, it's it's funny we've gotten we've gotten a slowdown in the economic data that has happened for the last month or so. Really, the only strong piece of economic data we've gotten in a while was last month's payroll report, which came in at two hundred and seventy thousand, which then was revised lower this month. J Powell last week
was commenting on how he's seeing disinflationary forces. I think earnings are a lagging indicator, and I think that the economy is slowing down, but it's I don't think it's going to show up in this quarter's earnings.
Do you think that for investors it's going to matter more how when the Fed starts cutting, what the results of the presidential election are, or what earnings, particularly from the AI names deliver this quarter.
I think the biggest factor out of the three that you mentioned is the presidential election. I mean that's going to determine the path for monetary policy going forward in twenty twenty five, in twenty twenty six, and if if Trump gets re elected in November, then I think what you're going to see is probably a rate cut cycle that lasts throughout twenty twenty five. You might see one hundred to one hundred and fifty basis points of great cuts. I think if Biden gets re elected, I think it's
more of the same. I think it's more of a higher for longer trade. So yeah, for sure, the election is going to be the biggest catalyst there.
Jared, what do you again?
We've talked about the concentration risk here and if I don't know, I guess somebody wants to be brave enough to try to break away from that and look to other areas of the market. Do you see opportunities in other areas of the market, whether it be a valuation entry point or whether it's just some parts of the market are just kind of mispriced.
Well, I think I think the.
Biggest opportunity is some kind of reversion in the style box trade. If you know, we've had large cap growth outperforming small cap value for the last twenty years, and you know, I started my career in nineteen ninety nine and that was also a time with large growth was outperforming small cap value. But when small cap value turned around two thousand and one or two thousand and two. That was a really big move and it made the
careers of a lot of investors. So I think if you can time that right, if you can catch that, then that's a really big opportunity.
I mean, I feel like, yes, how like what are the sign I mean, mister, are both of you guys who've been in the market for a while, like, how do you time that? Because I feel like everyone's waiting for small caps to have their moment, slash value to have their moment, and that moment.
Is like fleeting.
It's like, here's a week and then see you later.
Yeah, that's exactly what it's been. You've had these You've had these sort of blips along the way where value outperforms and then it goes back to getting killed again. I don't really have the answer to that, although you know, I will say that the average stock in the S and P five hundred is not super expensive. The median stock in the SMP is about in eighteen pe, which you know is pretty reasonable over time. It's really a handful of stocks on the high end that have gotten really expensive.
So Jared Alex and I were just discussing a story in the Bloomberg Turmoil about how younger people are beginning to trade at a much younger age. So, for example, gen Z started investing when they're nineteen on average, that's according to Charles Schwab. That compares to thirty two for gen X and thirty five for baby boomers. So people are getting into the market a lot younger. Are you seeing that in your business, in your newsletter business and your commentaries.
Well, it's funny.
Because in my spare time, I'm also an adjunct professor at Coastal Carolina University, and I teach these young people, and I would say that jibes with my experience. I've you know, in my last class, I would say about forty to fifty percent of the class had brokerage accounts. They had no idea what they were doing. I mean, they were just screwing around, but they but they and a lot of them tradeto by the way. Yeah, so it's a mixture of crypto and in video and stuff
like that. But yeah, they are starting at a younger age.
Is this like a good thing or a bad thing? We were debating this earlier, Like, I mean, it's a good way to lose money, but isn't it also good to kind of make money and be and take control of your finances. Like, what do you think about that?
Well, I think it's a I think it's a good thing. But I don't think anybody's taking control over their finances. I think what they're doing is learning. I think they're learning how to invest, and they're making mistakes in early age when they can afford to make mistakes. If they lose eight hundred bucks on video or some crypto token,
there really are no consequences. The consequences are if you start investing later and you're investing real money and you make mistakes, then then that's that's hard to reverse.
All right, Jared, thanks so much for joining us. Jared Dillon.
He's the founder of the Daily Dirt nep, a financial column and or money letter that goes out.
It's been doing that for quite some time.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
We take it to Bloomberg n EF that research is also awesome. They cover commodities, power, transport, industry, buildings, AG sectors as well as cost cutting technologies and sustainability issues and the goal is to help business, finance, and governments navigate the change as we move towards a green future. Speaking of let's go to green. Martin Tangler is head of green Hydrogen over at Bloomberg and EF and he joins us. Now, Martin, I'm just asking for Paul, what's green hydrogen?
So just to give you a correction, I'm the head of hydrogen research, not just green hydrogen.
Okay, good to know.
We like that.
Green hydrogen is one way of producing hydrogen via electrolysis. So that's splitting water into oxygen and hydrogen using green electricity. So that's what green hydroen is.
So explain to us where this technology green hydrogen? Where are we in terms of the development of this technology.
Yeah, so this is a really.
It's an old technology. At its core, we've used it for more than one hundred years. We've done electrolysis of breaking up water molecules into hydrogen oxygen. What's new though, is that this time we want to use green electricity in order to reduce the emissions from the production of
what's called gray hydrogen. Gray hydrogen being hydrogen made from fossil fuels without any capturing of the resulting CO two, which is how we might make the vast majority of the hydrogen today, and many countries, many governments have been incentive devising the production of green and sometimes also so called blue hydrogen that's gray with carbon capture and storage attached to that, so that we can decarbonize a deproduction of the gray hydrogen that we already produced today one
hundred million tons. It's a lot of hydrogen we make, and also to use hydrogen in some other sectors to decarbonize things like steel production, for example, or shipping where it's really hard to do electrification.
Why do we want hydrogen? It is very expensive to split. It is more expensive if you are going to split a hydrogen and oxygen using renewable energy.
So why do we want it?
What's the end product? So awesome?
Yeah, So we want it, as I've said, in order to reduce emissions. That's the only reason honestly. Today, making green hydrogen, as you said, Alex, is more expensive than making gray hydrogen, and in turn making gray hydrogen is more expensive than using fossil fuels because hydrogen is made gray hydrogen is made from those fossil fuels. So we only use hydrogen in sectors where it is required for the chemical properties of it today, So that's production of fertilizers,
things like ammonia NH three. You cannot make NH three without putting H in there.
Right.
Same goes for all refining. You need hydrogen and for future as I've said, we're going to need it for sectors that are going to be really hard to decarbonize using electrification. For example, it's really hard to run a ship that runs across half the world on batteries. You just don't have enough batteries. Batteries are too heavy, they
take up too much space. We need something denser, and one way we could do that, for example, is to combine hydrogen and nitrogen into ammonia, or hydrogen carbon and oxygen into methanol and use those to power the ship instead as a more energy dense fuel.
Martin Which countries or which parts of the world are leading in this green hydrogen move.
This is a really hard one to say. If you asked people five years ago, they tell you, it's totally Japan that's leading. Japan is the first country that had a hydrogen strategy way back when in twenty fourteen, when nobody has even thought about hygien to the extent that many people are today. But now you could say the real leaders are the US and European Union and its member states. In the US, as you're probably aware, the Inflation Reduction Act was passed back in August twenty twenty two.
There were some pretty generous tax credits for the production of green and blue hydrogen, and we're seeing especially the blue hygiene projects in the US now coming through because the economics could actually work out on green. It's a bit more difficult because companies are still waiting on guidance as to the rules under which they could claim these credits. In Europe, there's a lot of excitement. Europe is the one place since probably the most sincere desire to decarbonize
and the strongest policies to do that. We have carbon prices, mandates to use hydrogen. There's very few other places where you have actual mandates that require use of hydrogen for for example, shipping or aviation. That's what we're seeing in Europe.
They have a question that I keep hearing about is you know, the IRA, for example, did a great job in incentivizing production of it, helping bring down the cost. But where it looks like things are falling short is the demand side. So despite those subsidies, the buyer and the seller costs for hydrogen is still very far apart, and that's creating a difficulty in securing that demand. Where is that gap right now? And how do you see that evolving?
Yeah, that's actually the key issue, Alex. You really hit the nail on the head. There's so many projects out there, and we have a database for that at BNF, So for those of you who have access, definitely do come and check it out if you haven't already. We have a database of production projects. So that's all the projects or all the companies with all their projects that would
want to produce hydrogen. And we're talking tens of millions of tons, sixty million tons by twenty thirty, So that's compared to hundred that we already make today with the gray hygroens. It's a vast, vast increase that we could see if only there was actually someone who would kindly want to buy that green hydrogen or that blue hydrogen, and why don't they want to buy it because it's expensive, like I've said at the beginning, and what's needed to
bridge that well. First, ideally the cost of renewables should come down, and they will be coming down, as benf keeps writing, that's great, because the key input into the production of green hydrogen is the cost of green electricity. Then we need to see the cost of electrolyzers, so that's the machines that split the water into oxygen and hydrogen. They'd need to get cheaper. That's going to happen, but so far we've seen the opposite. The costs have actually
gone up. The supply chain issues with hydrogen with electrolyizers have been quite challenging. And finally we need to see policy, and we see a lot of policy on the supply side. So the US, for example, forty five v forty five q credits for the from the IRA for the production of green or blue hydrogen. That's great, but that's probably not enough, maybe enough for blue, but not enough for
green to want somebody to buy it. So that's where the European Union comes in with things like quote as mandates that a certain sector must use a certain amount of hydrogen by a certain date. And that's a pretty crude way of enforcing hydrogen demand. And there's many, many pros and cons of that, but that's one way to get it done.
All right, Martin, thank you so much for joining us.
Martin Tangler, head of hydrogen Research at DNEPP.
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